September 21, 2020

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How To Read Financial Statements

A Beginner’s guide is the way to read financial statements of a company:  If you would like to take a position successfully within the stock exchange, you would like to find out the way to read and understand the financial reports of a corporation. Financial statements are tools to gauge the financial health of the corporate. During this post, we are getting to discuss the fundamentals of the way to read financial statements of a corporation. Here you’ll find out how to read the record, earnings report, and cash flow statement of a corporation.

Even though this isn’t a very interesting topic,it’s really important that you simply find out how to read financial statements of a corporation for achieving success in your investing journey.  Without  any further ado, Let’s start.

How do you actually get financial statements of a company?

Before we start analyzing the financial statements of a corporation, the primary thing that you simply got to know is where exactly to seek out them. Where are you able to see or download the financial statements of a corporation that you’re researching?

Well, you’ll find the financial statements of a corporation in any of the subsequent sites: 1) BSE/NSE Website, 2) Investor relation page on Company’s website 3) Financial websites (like screener, money control, investing, etc)

In India, the Securities exchange board of India (SEBI) regulates the financials announced by the corporate and checks out to stay it as fair as possible. Further, if you’re using the other non-reputed website, confirm that the reports are correct and not tempered.

Three Core Financial Statements of a corporation

Now, allow us to understand the various financial statements of a corporation. The financials of a corporation are split into three key sections. They are:

1. Balance sheet

2. earnings report (Or Profit & loss statement)

3. income statement.

The record shows the assets and liabilities of a corporation i.e. what it owns and owes. Second, the earnings report shows what proportion profit/loss the corporation has generated from its revenues and expenses. and eventually, the income statement shows the inflows and outflows of money from the corporate.

It’s essential that you simply have the skills to read all of those financial statements. Let’s understand each statement one-by-one.

How to read financial statements of a company?

1. record

A record may be a budget that compares the assets and liabilities of a corporation to seek out the shareholder’s equity at a selected time. The record adheres to the subsequent formula:

Assets = Liabilities + Shareholders Equity

Here, don’t get confused by the term ‘shareholder’s equity’. it’s just another name for ‘net worth’ of the corporate.  In other way, the above formula are often also written as:

Shareholder’s Equity = Assets – Liabilities 

Quick Note: you’ll easily understand this with an example from day to day life. If you own a computer, car, house, etc then they are often considered as your asset. Now your personal loans, mastercard dues, etc are your liabilities. Once you subtract your liabilities from your assets, you’ll get your net worth. an equivalent concept is applicable to companies. However, here we define net worth because the shareholder’s equity.

Why are balance sheets important?

The record helps an investor to gauge how a corporation is managing its financials. The three record segments- Assets, liabilities, and equity, give investors a thought on what the corporation owns and owes, also because the amount invested by shareholders.

Key elements of a record

Assets and liabilities are two key elements of a record. However, both assets and liabilities further comprise various elements. Let’s define both of those to know them in details:

1) Assets: it’s an value that a corporation controls with an expectation that it’ll provide a future benefit. Assets are often cash, land, property, inventories, etc. Further, assets are often broadly categorized into:

• Current (short-term) assets: These are those assets which will be quickly liquidated into cash (within 12 months). for instance cash and cash equivalents, inventories, account receivables, etc.

• Non-Current (Fixed) assets: Those assets which take quite 12 months to convert into cash. for instance- Land, property, equipment, long-term investments, Intangible assets (like patents, copyrights, trademarks), etc.

The sum of those assets is named the entire assets of a corporation.

2) Liabilities: it’s an obligation that a corporation has got to pay within the future thanks to its past actions like borrowing money in terms of loans for business expansion purposes etc. Like assets, it also can be broadly divided into two segments:

• Current liabilities: These are the obligations that require to be paid within 12 months. for instance payroll, indebtedness, taxes, short-term debts, etc.

• Non-current (Long-term) liabilities- There are those liabilities that require to be paid after 12 months. for instance long-term borrowings like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments, trade payable, etc.

Now, allow us to understand these segments with the assistance of the record of a corporation from the Indian stock exchange. Here is that the record of ASIAN PAINTS for the financial year 2016-17. I even downloaded this report from the company’s website here.

Please note that there are always a minimum of 2 columns on the record for consecutive fiscal years. It helps the readers to watch the year-on-year progress.

Although the record looks complicated, however, once you learn the essential structure, it’s easy to know the way to read the financial statements of a corporation. a couple of points to notice from the record of Asian Paints:

1. There are three segments within the record of Asian paints: Assets, equity, and liability.

2. It adheres to the essential formula of the balance sheet: Assets = Liabilities + Shareholder’s equity. Please note that the primary column of asset (TOTAL ASSETS = 9335.60) is adequate to the second & third column of equity and liabilities (TOTAL EQUITY & LIABILITY = 9335.60).

Now, allow us to move to the second important budget of a corporation.

2. earnings report

 An earnings report summarizes the revenues, costs, and expenses incurred during a selected period of your time (usually a fiscal quarter or year). the essential equation on which a profit & loss statement is predicated is:

Revenues – Expenses = Profit

In simple words, what a corporation ‘takes in’ is named revenue and what a corporation ‘takes out’ is named expenses. The difference within the revenues and expenses is net income or loss.

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